March 31_ 2006

March 31, 2006
A Benefit for Insurers
By MILT FREUDENHEIM
Critics who say the private insurance industry got too big a role in the new Medicare
prescription drug program may not know the half of it.
For patients, the program's rollout has had mixed reviews, with many happy customers
but more than a few tales of woe. But for many big insurers, the new Medicare program
is shaping up as a great opportunity. And prescription drugs may be only a starting point.
So far, about 18 million Americans are participating in the new drug program, known as
Medicare Part D. If things play out the way some big insurers hope, the drug program
could prove to be a feeder system into a much greater private presence in Medicare — a
longstanding goal of the Bush administration.
Insurers like Humana, which says it has signed up 1.7 million Medicare drug plan
members, know that the real money is not in providing drug insurance. The rewards are
much richer in other types of Medicare policies, including complete managed care plans
called Medicare Advantage, which are operated by the private insurers but subsidized by
Medicare. Michael B. McCallister, Humana's chief executive, refers to the new Medicare
Part D drug program as part of a broader "Medicare opportunity" for his company.
"There's going to be a lot of people that are going to have Part D cards that are going to
become interested in a Medicare Advantage plan," said Mr. McCallister, who has been
unusually candid about the springboard strategy.
In January and February, which were the first months of the Part D drug program,
Humana was also able to add more than 140,000 new Medicare Advantage customers to
its rolls.
One of them was Frank Stallings, 78, a retired college professor in Highland Heights,
Ky., who recently switched from a Part D plan to a Humana Medicare Advantage plan.
"So far, Part D has worked O.K.," he said. "I felt like I needed something else to help me
out with other things not covered by Medicare."
Unlike his Part D drug plan, which carried a monthly premium of $26, there is no
premium for his full-coverage Medicare Advantage plan — although his drug co-
payments are a bit higher, and there will be co-payments for some other medical services.
Other big insurers like Wellpoint and the UnitedHealth Group — the Part D leader so far,
with 4.5 million enrollees — are also recruiting members for Medicare Advantage, as
well as customers for Medigap, another type of Medicare-related policy. Medigap is a
supplemental policy that helps with the remainder of medical expenses not fully covered
by conventional Medicare.
While the stand-alone Part D drug plans are expected to give insurers a small profit, the
margins are likely to be thin — 1 percent to 3 percent before taxes, Humana estimates.
That is partly because Humana is offering low premiums and co-payments to attract
customers. And the federal subsidy for each customer in a stand-alone Medicare drug
plan is only about $75 a month.
But for providing a full Medicare Advantage health policy to a patient, the government
pays the insurer $900 to $2,000 a month beyond whatever premium, if any, the patient
pays. With that revenue, come bigger profit margins — 3 percent to 5 percent, according
to James H. Bloem, Humana's chief financial officer.
For UnitedHealth, the Part D drug business by itself would not be particularly lucrative,
adding only 5 to 7 cents to earnings a share, according to Jason Nogueira, an analyst who
tracks health care companies for the investment firm T. Rowe Price. That would be no
more than 2 cents on the sales dollar for UnitedHealth, which had $45 billion in 2005
revenue and expects profit of $2.90 a share this year.
So the real financial opportunities lie in upgrading Part D enrollees to other Medicare-
linked policies. In essence, the high federal subsidies for Medicare Advantage policies
are the government's reward to insurers for taking people out of traditional, federally
supervised Medicare and into the commercial world of managed care. In fact, Medicare
now pays private insurers 15 percent more, on average, to take a patient than it spends in
a traditional government program for each patient.
Critics of Medicare's approach, including a number of senior Democrats in Congress,
have asked the Congressional Budget Office to examine the issue. The budget office
estimated that Medicare could save more than $40 billion over the next 10 years if
subsidies to insurers were scaled back to the levels the program now pays directly to
doctors and hospitals.
Representative Pete Stark of California, the senior Democrat on the Ways and Means
Committee, said in an interview that insurance agents "are out trying to promote seniors
into Medicare Advantage plans, and switch them out of plans they are in."
The Medicare law that created the Part D program, Mr. Stark said, "was written by
insurance company lobbyists with the help of pharmaceutical company lobbyists."
In a telephone interview, Michael O. Leavitt, the secretary of health and human services,
defended the administration's market-based approach to Medicare, saying that market
forces were pushing prices lower and that any kinks in Part D would be worked out.
"The market will become simplified because consumers want that," Mr. Leavitt said.
As long as the incentive of federal subsidies stays at current levels, insurers have every
reason to pursue them, especially as the industry struggles with slowing growth in its
traditional core business of managing employer-sponsored health benefits.
Charles Boorady, a health care securities analyst at Citigroup, said that by expanding
Medicare-subsidized offerings, the insurance industry had a potential revenue opportunity
of more than $450 billion a year "or enough to almost double the revenue of the managed
care industry."
Even before the new drug plan went into effect in January, some insurers had significant
numbers of Medicare Advantage customers. Humana, for example, had 558,000.
UnitedHealth had 1.1 million in Medicare Advantage; it also had an additional 2.5
million AARP customers with Medigap cards, and most of them have added the Part D
coverage that UnitedHealth is offering through AARP.
By the end of February, Humana had already raised its total of Medicare Advantage
members to 700,000 and had set a goal of 900,000 to 1.1 million by Dec. 31. The
company expects to add more in 2007. New figures released by Medicare last week
indicate that 6.3 million of the 18 million people enrolled in Plan D voluntarily signed up
for the drug program; in all, 43 million people are eligible for it. An additional 5.7
million in the program are people who were subscribers to Medicare Advantage health
plans that did not cover prescription drugs but they added the coverage.
The government's real gift to the insurers was 6.4 million low-income people on
Medicaid or other public-assistance programs who were automatically assigned to Part D
or Medicare Advantage plans. They were allocated among insurers ready to meet Part D
rules, with most going to those that had Medicare Advantage plans throughout the United
States.
Under this allocation, the government gave UnitedHealth 1.2 million Medicaid assignees;
the next biggest were Humana and Wellpoint, which each got about 600,000.
Those insurers can be sure of collecting 100 percent of the premium from the government
for the lowest-income enrollees, and they are paid on a sliding scale if the enrollees are
eligible for other state assistance.
Not everyone, though, sees a huge opportunity in the industry using the Medicare drug
program as a springboard into fuller lines of coverage.
Ed Kroll, an analyst at the investment research firm SG Cowen, notes that in the past,
prescription drug coverage was a major reason people signed up for a Medicare
Advantage managed care plan. Now, with Part D, people can have their drugs paid for
without joining a broader plan, he said, and can simply let plain old Medicare benefits
cover their other health needs.
Aetna, the third-largest insurer, after Wellpoint and United, has not made a big push into
Part D. The company has only 375,000 Part D drug plan enrollees so far. Aetna — like
Cigna, the No. 4 insurer — is more concerned with commercial customers and is "not
strategically focused on Medicare or Medicaid," Mr. Boorady of Citigroup said.
Even for companies like Humana, which do have that focus, the big challenge will be
overcoming the bad publicity the Part D program has tended to receive in the early going.
And for those who do agree to trade up, insurers will not be able to take their loyalty for
granted.
Florence Bryan 65, a retired grocery worker in Winchester, Va., met a Humana
saleswoman in a Wal-Mart store late last year; she was promoting Part D and Medicare
Advantage. "I went on her recommendations," said Ms. Bryan, who joined a Humana
Medicare Advantage plan in January. Now, she has her "first glitch." Her Humana plan
covers only half her monthly requirement of 60 Prevacid pills, which she for stomach
problems. "The Humana representative said the doctor should call an 800 number to get
an authorization," she said. "But the doctor's office said the insurance company needs to
fill out a form and send it to the doctor." When contacted, a Humana spokesman said the
company intended "to resolve this issue for Mrs. Bryan as soon as possible."